Full Disclosure in Financial Reporting Assignment Instructions
According to the textbook, the goal of financial reporting is to report financial information that is transparent and complete and truthfully report the financial performance of a company. Investors and other interested parties need to read and understand all aspects of financing reporting.
Use the Internet to research Verizon Communications financial statements, annual report, notes to the financial statements, president’s letter, and management discussion and analysis from the most recent year in order to complete this assignment.
Write a five to six (5-6) page paper in which you:
- Discuss the disclosure requirement on accounting policies, and identify at least two (2) examples of the most commonly required disclosure. Explain the key ways in which the examples you provided are useful to financial statement users. Analyze Verizon Communicationsâ€™ disclosure on accounting policies, and give your opinion on whether or not the information is helpful for decision making. Provide a rationale for your response.
- Explain the importance of the management discussion and analysis section of an annual report. Select three (3) items from Verizon’s management and discussion analysis of the annual report that could be useful to potential investors. Provide three (3) specific examples of how the three (3) items you selected could influence a potential investor’s decision to invest in Verizon.
- Describe segmented information, and explain the way in which companies determine segments. Identify at least three (3) advantages and three (3) disadvantages of segmented financial data. Give your opinion on whether or not the advantages outweigh the disadvantages. Outline the manner in which Verizon segments its financial data. Suggest key actions that Verizon’s management can take in order to improve the company’s segmented financial data. Provide a rationale for your response.
- Analyze the various types of auditors reports, and determine the impact that the auditors report has on a companys ability to obtain financing from a bank. Identify the type of auditors report issued on Verizon and speculate the way you believe banks will perceive Verizons auditors report.
Full Disclosure in Financial Reporting – Verizon Communications
Disclosure Requirement on Accounting Policies
Every company prepares financial documents after a certain period and releases them to the public. Financial documents are important for shareholders and prospective investors. However, these documents must be prepared in accordance with accounting policies. According to (Powers, & Needles, 2012) accounting policies are the procedures that companies follow while making their financial documents. These policies define the methods that are to be employed in the design and presentation of financial documents. The accounting policies have the disclosure requirement, which is critical in the creation of detailed and proper financial documents that are easy to understand. Moreover, the disclosure requirement ensures that no misleading policy is employed and helps in the understanding of the nature of management style of reporting company revenues.
Examples of Commonly Required Disclosures
The release of financial information of a firm is not enough in itself, there is need for other items called disclosures. In addition to the footnotes and financial statements, some of the following disclosures are normally included:
- A letter from the chief executive to the company stakeholders
- The management report on internal controls over the financial reporting
- Management discussion and analysis
- Quarterly summaries of stock prices and profit performance
- Independent auditor’s report
The financial accounting disclosures are important to the firms and user of financial accounting statements (Powers, & Needles, 2012). The major users of the financial statements are the investors and company stakeholders. The disclosures like the stock prices and profit performance indicate how profitable a firm is and helps in attracting new investors. The auditor’s independent report is verification to the company’s financial statements on how it represents its financial position, which is important in seeking investment from financing institutions. In addition, the management report on internal control over financial reporting acts as source of confidence to investors on the ability of the company to maintain healthy financial system.
Verizon’s Disclosure on Accounting Policies
The analysis of Verizon’s 2015 financial report reveals that the company provided full disclosure on accounting policies. The financial report has the chief executive officer’s letter to the company stakeholders; there is an independent auditor’s report, management discussion and analysis, report on management internal controls and the quarterly summaries of stock prices and profit performances, among other disclosures (Verizon, 2016). It is of the opinion that the disclosure information is useful for decision making. The information on stock prices and profit performance, are useful for potential investors as they can use it to make decisions on whether to invest in the company. The auditor’s independent report is useful for financial company in making decisions on whether to extend financial assistance to the company.
Importance of Management Discussion and Analysis Section in Annual Report
According to (Kimmel, Weygandt, & Kieso, 2009, p. 22) the management discussion and analysis (MDA) offers many insights on company’s financial aspects including the ability to fund its operations, ability to meet short-term obligations, as well as the results of its operations. According to (Wahlen, Jones, & Pagach, 2012) the MDA section importance arises from the management discussion of the financial and non-financial information. The section helps to highlight on the nature of the company’s operations and its management style. The no-financial aspects that affect the company such as domestic and international market risks, causes of material changes and effects of inflation, are important for potential investors as they can analyze the impact of such factors on company’s profitability and their choice to invest in the company. The growth prospects and factors that influence company performance are also important for investors and shareholders as they outline the company’s prospects for long-term profitability.
Verizon Communications’ Management Discussion and Analysis Section
The financial report of Verizon communications possesses several disclosures. Among the disclosures that are included in the management discussion and analysis section include the disclosures about capital expenditures, operating costs and expenses and operating revenues (Verizon, 2016). The operating revenues provide information related to the company’s profitability, current and future sources of revenues. This information is of great importance to the potential investors. For example, potential investors scrutinize such information to determine the company’s profitability and in deciding on whether it is worth their investment.
The disclosures on the company’s capital expenditures provide information related to the company’s ability to invest in its capital assets. Such information is important, for example, it shows how Verizon’s capital program can or will influence its revenue generations. Capital programs that are likely to increase company revenues would be appealing to potential investors. The disclosures on operating expenses and costs provide useful information to potential investors and possess the ability to influence investor interests in the company. For example, strategies that are designed to mitigate against impacts of costs are likely to influence potential investors to invest in the company. In Verizon, the disclosures on the company expenses and costs reveal that the company expects an increase in its costs owing to increasing sales of Smartphone (Verizon, 2016, p. 13). In response, the management asserts that they expect to mitigate the same by undertaking head count and organizational realignment. Outline such a strategy offers confidence to potential investors, who feel that though the company faces the prospects of increasing costs in the foreseeable future, it has other alternatives of protecting its bottom line.
The strategy of segmented reporting applies to companies that have diversified business. According to (Wahlen, Jones, & Pagach, 2012) segment reporting involves the process of providing disclosure information for different entities to report on their operational performances. In order to use segmented reporting, the individual segments must be reportable and the company must follow certain steps.
How Companies Determine Segments
Not all segments that operate are reportable. According to (PKF International., 2016, p. 828), segments are only required to be reportable if they exceed the quantitative thresholds. The IFRS8 provides that a segment should be reported separately if the reported revenue is 10% or more of the combined revenues of operating segments, if its assets are 10% or more of all operating segments and if its profit or loss exceeds the combined profits/loss of operating segments. The step in the identification of segments include identification of operating segments, segregating them, determining reportable operating segments and providing disclosure information about the segments (Burton, & Jermakowicz, 2015, p. 211).
Advantages and Disadvantages of Segmented Data
The use of segmented data offers advantages that include increased integrity by revealing the underperforming and non-performing areas, provision of flexibility to creditors and investors by highlighting performance and financial positions of important segments. In addition segmentation of financial data helps in analysis of fluctuations in earnings. However, its major disadvantages include possibility of revealing source of major competitiveness to rival firms, it makes it difficult to obtain uniform financial reporting and is problematic and labour intensive because a firm will incur extra costs of external audit and many accounting departments in charge of the different segments.
Opinion on Whether Advantages Outweigh Disadvantages
Although segmenting reporting offers increased accountability, the fact that it creates the possibility of revealing source of competitive advantage and increased costs, the disadvantages outweigh the disadvantages. In the modern competitive market where companies struggle to increase market share and profits, cutting on costs and increasing competitive advantage have become some of the key areas of focus. Unfortunately segmented reporting is likely to become a threat rather than a strategic tool for a company that enjoys no monopoly in a competitive market place.
How Verizon Segments it’s Financial Data
Verizon Communications segments its financial data based on the wireline and wireless market segments, which are the company’s strategic units. However, the company can improve its data segmentation by creating entities based on the regions rather than its two major divisions of wireline and wireless. The market in which the company operates is large and using regions helps in creating easily manageable and high growth entities. The use of regions allows a better way of determining the growth and profitability of the business in various regions rather using cumulative data for whole country in specific divisions of the company.
Types of Auditor’s Reports
The four types of auditor’s reports are the qualified, unqualified, adverse and disclaimer reports (Loseva, 2015). In issuing audit report, independent auditors are responsible for the opinion regarding the financial accounts of their client, which is an indication of the readability and assurance that the financial information fairly reflects the financial position of their client as stated in the annual financial statements. It is their responsibility to offer an opinion and not correct or offer advice to the client on how the financial statements should be presented nor point any anomalies for the client to correct. The nature of the auditor’s report can determine whether a company can access to loans or not. If the financial statements are not dependable, an adverse auditor’s opinion can enable a company to access loans. Similarly, a qualified auditor’s report can enable a firm to gain access to loans.
The Type of Auditor’s Report Issued on Verizon
The audit firm for Verizon Communications Inc. and its subsidiaries is Ernst & Young LLP (Verizon, 2016). The firm issued unqualified opinion, as shown with the nature of audit, which is labeled as “independent”. The company using the report can gain access to loans as it offers assurance that the financial statements represent the true financial position of the company as at 31-1-2015.